Foreign, local pressures boost Saudi rates

Dubai, April 4, 2012

Saudi Arabia's market interest rates are climbing as the economy booms, but the rise is as much due to international pressures as strain on banks' lending resources, and any hike of official rates probably remains distant, say analysts.

The increase in interbank lending costs underlines how Saudi Arabian money markets are returning to normalcy since a sudden increase in the government spending last year, announced in response to the Arab Spring uprisings in the region, flooded the banking system with money and pushed rates down to record lows.

The three-month Saudi Arabian Interbank Offered Rate (Saibor) has risen to 0.88 per cent, its highest level since May 2009, from last September's low of 0.60 per cent.

Longer-term interbank rates up to one year have increased by slightly smaller margins, while Treasury bill yields are up in sympathy.

The trend coincides with the country's fastest economic growth in a decade, thanks to high oil prices and heavy government spending on infrastructure and social programmes.

Economy and Planning Minister Mohammed al-Jasser said this week that gross domestic product was heading for 6 percent growth this year after 6.8 per cent in 2011.

But other data suggests the economy is still far from the late stage of an economic cycle in which higher demand for funds puts heavy pressure on supply, pushing up market rates.

Commercial banks' excess deposits at the Saudi Arabian Monetary Agency (Sama) stayed high at SR88.5 billion ($23.6 billion) in February, data released by Sama at the weekend showed.

That was down from SR95.4 billion in January but well above levels of around 50-60 billion that prevailed in most of the second half of 2011.

Meanwhile, the ratio of banks' private sector loans to their deposits was 78.5 percent in February, barely changed from January and below levels around 80 percent seen in the second half of last year. That leaves plenty of room for banks to expand lending further if needed.

Excess funds in the banking system are still high and haven't decreased to the point where their level would boost domestic market rates, said Paul Gamble, head of research at Jadwa Investment in Riyadh. 'The pressures for higher rates are external.'

One pressure is higher short-term US dollar rates, which have risen from their mid-2011 lows, partly because of signs of greater strength in the US economy.

Saudi pegs the riyal to the dollar so arbitrage between the two currencies tends to limit how much rates can diverge.

'The level of interest rates has been rising with the level in the US because of the exchange rate peg - rates have been following US dollar Libor, with a bit of a lag,' Gamble said.

But US rates are not the full story; since the start of this year they have stopped rising even as Saudi rates have continued climbing.

One-year Saibor is now 4 basis points above the one-year dollar London Interbank Offered Rate , after being 9 bps below it at the start of 2012.

So many analysts think the rise in Saudi rates is also due in part to banks demanding higher rates because of risks they see in the global economy, such as the euro zone debt crisis, or geopolitical dangers in the region.-Reuters